Question

Discuss at least three (3) conditions under which preferential trading arrangements will most likely lead to trade creation and increased welfare of member nations.

Answer 1

Preferential trading arrangements is a policy of economic integration which provide lower barriers on trade among participating nations than on trade with non member nations. This is the loosest form of economic integration . Member nations of preferential trade arrangements can enable them to export and import with low barriers. 1. Trade creation occurs when some domestic production in a nation that is member of the preferential trading arrangements is replaced by lower -cost imports from another member nation. Each nation can import commodity from low cost nations ,It will increase the welfare of nation . By specialising in a commodity which has comparative advantage leads to complete utilisation of resources 2. Assuming that all economic resources are fully employed before and after formation of preferential trading arrangements , increases the welfare of nation , because it leads to greater specialization in production based on comparative advantage . Because comparative advantage allows each member nations can specialize in the production and export of commodity which has comparative advantage 3.A trade -creating preferential trading arrangements also increases the welfare of non members because some of the increase in its real income due to its greater specialisation and production and it results spill over into increased imports to rest of the world